Getting Rid of an Annual Fee…without Damaging Your Credit

Downgrade.  Unless it’s a fever, for which more cowbell may or may not be the only prescription, the word downgrade does not typically connote something good.  But in the credit card world, a downgrade can be a terrific thing.  And because so many of you just read that and are dying to see it again, here you go… you’re welcome.
So, what does it mean to downgrade a credit card?  Well, the easiest definition is 
to re-purpose an existing credit card as another completely different card, resulting in a general decrease in benefit level.”  Noah Webster eat your heart out.  Seriously, that’s what it means.  Take an existing card, call the issuing bank, and then say, can you convert this card to a different product you guys offer?  Now, why would you do this?  Well, the most common instance is when you no longer want to pay the annual fee on the card. As you probably know, many of the best annual fee-based cards give you the first year to try it out without paying that fee.  If you love the card, then you pay the annual fee each year (or call and pretend to threaten to cancel it in hopes they will waive or partially offset the annual fee).  If you don’t love the card, then the question becomes “should I cancel it?”  Well, if you have read my “seminar“, then you already know that canceling is usually a last resort.  Why?  Because losing that credit line actually increases your debt utilization (credit used divided by credit available), which decreases your score.  So, if you can keep the credit line without the annual fee, it helps your score.  Another option, if you already have more than one card with that card issuer, is to see if you can transfer the line from the card you no longer want to a card you plan to keep.  That way canceling the card really just gets rid of “the card”, not the credit that came with it.  Your mileage will vary on this option. Now, before I get to a concrete example I just went through, let me throw out one caveat.  I am not saying that you should never cancel a credit card.  I’ve divorced many credit cards, breaking the hearts of the issuing banks only temporarily as I always come crawling back for another one of their cards.  If it’s a card you only recently signed up for, then canceling is not the end of the world.  Why?  Because another factor in your score is the average age of your credit.  So, canceling a card you’ve had since 2001 is absolutely a no-no, because it is truly helping your score, even if you don’t use it.  Canceling a card you’ve had for 11 months may hurt from a debt utilization standpoint (as I just described in the previous paragraph), but it could actually help your average credit age.

From this…

 

to this.

 
So, here is my recent example, just to show you how the process works and to see how circumstances can vary from person to person.  I recently had a decision to make as to whether or not to keep my Business Starwood American Express card.  I loved it, particularly its 30,000 point sign up bonus and the exclusive offers American Express offers business card owners (let me know if you want to know more about those).  But I just couldn’t muster enough love for the card from a daily spend standpoint, even though everyone knows that Starwood points are one of the most valuable point currencies out there.  So, pay the annual fee and keep it, or switch to a no annual fee card that would not be a Starwood card (there are no no-annual-fee Starwood cards).  What made my decision was the knowledge that (for now at least) American Express will allow you to sign up for the Business version of the Starwood card and get the sign up bonus again if you have not had the card in 12 months.  Without this ability to get the bonus again in a year, I absolutely would have kept the card as  a Starwood card.  By the way, this churnability does not exist for the personal version; once you have received the bonus for the personal version, you won’t be getting that again.  So, I had American Express switch my card from a Starwood American Express to the Simply Cash card.  In a year, I should be able to sign up for the Business Starwood card again and get its bonus (either 25000 or 30000 points, depending on when I do it).  Now, why did I choose the Simply Cash card?
  • It’s a no annual fee card, which was my primary factor.
  • It earns 3% cash back on dining.  I always go with the Chase Sapphire Preferred on dining with its 2 points per dollar since 2 Chase points are more valuable than $0.03 to me, but Marci and I want to switch to cash back on a few categories for now as we are sitting on a good size pile of points already and want some cash.  I can switch back to the CSP any time I want with absolutely no penalty.
  • It earns 5% cash back at office supply stores.  Now, again, I always use my Chase Ink card for this category (5x points on office supply stores) since again, Chase Ultimate Reward points > cash, but for the short term, we’d like to put some cash back in our pocket.  And again, I can always go back to the Ink card for this spend category if I want.

When my shiny silver new Simply Cash showed up, it had the exact same account number as my old Starwood card, and I found that the payment address is also unchanged.  So, all in all, the process was pretty seamless. If you enjoyed this post, we do hope you will share it with your friends via Facebook or Twitter.

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